'Stage Three' of financial reform package unveiled

STANFORD -- It may take at least 65 financial professionals and an
additional $10 million this year to satisfy government requirements relating
to Stanford's indirect costs, Chief Financial Officer Peter Van Etten told
federal officials on Tuesday, Oct. 8.

Van Etten made the rounds in Washington, D.C., to deliver copies of a
document describing "stage three" of the university's financial reforms
(enclosed). He was accompanied by Reed Brimhall, recently appointed director
of Stanford's new Office of Government Cost and Rate Studies, and Larry
Horton, associate vice president for public affairs.

In discussions with Navy officials and members of congress, "we tried to
demonstrate Stanford's commitment to reform and to discuss the enormous
impact this issue is having on the university," Van Etten said from
Washington.

Stanford is paying "a very significant price" with changes in personnel
and the current budget shortfall, he told officials.

Van Etten said that he also expressed concern that conflict of interest
has been created by the qui tam lawsuit filed by Paul Biddle, resident
representative of the Office of Naval Research. Biddle could personally
recover as much as 30 percent of any damages awarded if Stanford were found
to have submitted fraudulent claims to the government.

The Stanford group also told officials that at 55.5 percent, Stanford's
indirect cost rate is now "far lower than our costs and has played a large
part in our projected annual deficit of $40 million," Van Etten said.

"We're concerned that we return to a fair and equitable relationship with
the government," he said.

The discussions were "open and frank," Van Etten said, declining to
elaborate.

To date, the university has withdrawn $2.3 million in cost submissions
from the past 10 years.

In the next year, Stanford may spend as much as $10 million from reserves
trying to satisfy government requirements. Much of that is "legitimately
chargeable to the government because it is a government-mandated expense,"
Van Etten said.

The 65-member team put together by Van Etten and his staff comprises
Stanford employees and experts from outside accounting firms, including
Arthur Andersen & Co., Coopers & Lybrand, KPMG Peat Marwick, and others.

The largest number of team members are developing new costing procedures
to replace those canceled by the government last spring. Among studies to be
done are those relating to the libraries, effort reporting, depreciation,
utilities and equipment inventory.

Responding to information requests from the Defense Contract Audit Agency
is the second most time-consuming effort, Van Etten said. The federal agency
is currently conducting 25 audits on campus of the university's records from
the last decade, he said.

Other Stanford team members are preparing reports on the actual costs of
operating the university for 1989, 1990 and 1991. Provisional indirect cost
rates normally are set based on expense estimates, then adjusted up or down
when actual costs were known.

Developing proposals for future rates also is consuming significant time.
A few team members are dealing with revision of internal controls, Van Etten
said.

The stage three document details:

Reorganization of the Controller's Office to create a new Office of
Government Cost and Rate Studies, and shifting of the Internal Audit
Department from management and operational auditing to financial and
compliance auditing.

Stanford's commitment to devote additional resources if necessary to
complete the tasks set out by the government.

Progress on implementing 35 recommendations made last summer by the
accounting firm of Arthur Andersen & Co., including a training program on
cost policy for 2,300 staff and faculty.

The possible use of $100 million in reserves during the next few years
to cover deficits caused by the government decision last April to lower the
university's indirect cost rate from 74 percent to 55.5 percent.

Establishment of an advisory group of 16 senior faculty on indirect cost
policy.

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